U.S.defense stocks have had a good year up to now, propelled higher by geopolitical factors. Several major companies have posted encouraging results while the broader sector has also reaped the benefits. Meanwhile, global defense spending is likely to rise as a new customer has entered the picture.
The rest of the year is also likely to be favorable for defense stocks since the conditions which led to such gains will probably remain in place. Picking creditable performers for your portfolio makes for a smart move to capitalize on the gains ahead.
Stocks of Sector Heavyweights Rise, Earnings Impress
Stocks of many sector heavyweights have gained considerably over the year while posting encouraging earnings at the same time. Lockheed Martin Corp. (LMT - Free Report) reported better-than-expected first-quarter earnings and revenues with both beating the Zacks Consensus Estimate by 2.8% and 5.5%, respectively. The stock has gained 10.6% over the last three months.
Additionally, Northrop Grumman Corp. (NOC - Free Report) reported upbeat first-quarter 2016 results with revenues and earnings beating the Zacks Consensus Estimate by 0.8% and 12.1%, respectively. Earnings and revenues of Raytheon Company (RTN - Free Report) also beat the Zacks Consensus Estimate during the first quarter by 5.1% and 5.6%, respectively. Shares of Northrop Grumman and Raytheon have gained 11.7% and 4.2% over the last three months.
However, this phenomenon is not simply restricted to a handful of companies. The largest ETF covering the sector, the iShares US Aerospace & Defense (ITA), has gained 3.6% year to date and 11.2% over the last three months.
Factors Boosting the Defense Sector
Defense companies thrive when the world is grappling with severe conflicts. Such a situation already exists in several regions of Africa and the Middle East. Meanwhile, sea related tensions are rising in Asia while the military posture of Russia has been a cause for worry. Nearly $29 billion worth of foreign arms sales have already been completed since January.
Meanwhile, a new market for arms will become available since Vietnam has been made accessible to U.S. companies. A removal of a ban on arms sales will help the defense industry capitalize on the exponentially high increase in arms imports that the country has been making over the last five years.
However, domestic expenditure on defense has only been modest in recent years. But change is coming to the White House at the end of the year, which may also result in an increase on this front. With a contest between Hillary Clinton and Donald Trump nearly certain, Clinton is being tipped to be ahead at the moment. She is likely to adopt a more hawkish posture, which would result in an expansion in domestic expenditure.
Defense stocks have been doing well this year. With rising global conflict and tensions in South China Sea, the trend is likely to persist. Stocks from the sector will continue to move higher as gains keep coming in.
This is why you must add select defense stocks to your portfolio. We have narrowed down our search based on a good Zacks Rank and other relevant metrics.
CAE Inc. (CAE - Free Report) provides simulation and modeling technologies, and integrated training services to the civil aviation industry and defense forces around the globe.
CAE has a Zacks Rank #2 (Buy) and its projected growth for the current year is 4.2%. Its earnings estimate for the current year has improved by 5.8% over the last 30 days.
KLX Inc. is a distributor and service provider of aerospace fasteners and consumables for civil and military customers.
KLX has a Zacks Rank #2 and its projected growth for the current year is 9%. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 13.30, lower than the industry average of 16.24. Its earnings estimate for the current year has improved by 1.7% over the last 30 days.
TransDigm Group Incorporated (TDG - Free Report) is a leading global designer, producer and supplier of highly engineered aircraft components that are used in in-service commercial and military aircraft.
TransDigm has a Zacks Rank #2 and its projected growth for the current year is 29.4%. Its earnings estimate for the current year has improved by 5.2% over the last 30 days.
Esterline Technologies Corp. is a specialized engineering and manufacturing company principally serving aerospace and defense markets.
Esterline Technologies has a Zacks Rank #2 and it has a P/E (F1) of 14.80, which is lower than the industry average of 16.24.Its earnings estimate for the current year has improved by 0.1% over the last 30 days.
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